External Auditing Exam Solutions
Course Introduction
External Auditing is a comprehensive course that introduces students to the principles, practices, and regulatory framework of auditing external financial statements. The course covers the role of the external auditor, audit planning and risk assessment, gathering audit evidence, and evaluating internal controls. Students learn about professional ethics, legal responsibilities, and the importance of independence and objectivity in the audit process. The course also addresses the preparation of audit reports, the application of auditing standards, and the impact of emerging technologies on audit practices. Through case studies and practical exercises, students develop critical thinking and analytical skills essential for conducting effective and reliable external audits.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 10th Edition by William F Messier Jr
Available Study Resources on Quizplus
21 Chapters
1523 Verified Questions
1523 Flashcards
Source URL: https://quizplus.com/study-set/3204 Page 2
Chapter 1: An Introduction to Assurance and Financial Statement Auditing
Available Study Resources on Quizplus for this Chatper
46 Verified Questions
46 Flashcards
Source URL: https://quizplus.com/quiz/63439
Sample Questions
Q1) You are a new staff auditor and you are auditing a company's inventory account.Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.
Answer: Student answers will vary.The following answer provides an example: To obtain direct evidence,an auditor might physically examine and count the items included in the ending balance of the inventory account.To obtain indirect evidence,an auditor might examine invoices from suppliers relating to purchases of inventory or test whether the internal controls over the inventory process were working properly.
Q2) Which one of the following statements best describes the concept of materiality?
A) Materiality is determined by reference to specific quantitative guidelines established by the AICPA.
B) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
C) Materiality depends on the nature of an item but not on the dollar amount of the item.
D) Materiality is largely a matter of professional judgment.
Answer: D
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: The Financial Statement Auditing Environment
Available Study Resources on Quizplus for this Chatper
63 Verified Questions
63 Flashcards
Source URL: https://quizplus.com/quiz/63438
Sample Questions
Q1) The fourth PCAOB standard of reporting requires an auditor to render a report whenever an auditor's name is associated with financial statements.The overall purpose of the fourth standard of reporting is to require that reports
A) State that the examination of financial statements has been conducted in accordance with generally accepted auditing standards.
B) Indicate the character of the auditor's examination and the degree of responsibility assumed by the auditor.
C) Imply that the auditor is independent in fact as well as in appearance with respect to the financial statements under examination.
D) Express whether the accounting principles used in preparing the financial statements have been applied consistently in the period under examination.
Answer: B
Q2) A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002).
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
Available Study Resources on Quizplus for this Chatper
74 Verified Questions
74 Flashcards
Source URL: https://quizplus.com/quiz/63437
Sample Questions
Q1) Which of the following is an example of a related party transaction?
A)An action is taken by the directors of Company A to provide additional compensation for vice presidents in charge of the principal business functions of Company A.
B)A long-term agreement is made by Company A to provide merchandise or services to Company B,a long-time,friendly competitor.
C)A short-term loan is granted to Company A by a bank that has a depositor who is a member of the board of directors of Company A.
D)A nonmonetary exchange occurs whereby Company A exchanges property for similar property owned by Company B,an unconsolidated subsidiary of Company A.
Answer: D
Q2) In order to properly preplan the audit,the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above.
Chapter 4: Risk Assessment
Available Study Resources on Quizplus for this Chatper
54 Verified Questions
54 Flashcards
Source URL: https://quizplus.com/quiz/63436
Sample Questions
Q1) When an entity moves into a significant new line of business,all of the following increase except:
A) Client risk.
B) Acceptable audit risk.
C) Risk of material misstatement.
D) Entity business risk.
Q2) Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
A) Turnover of senior accounting personnel is low.
B) Insiders recently purchased additional shares of the entity's stock.
C) Management places substantial emphasis on meeting earnings projections.
D) The rate of change in the entity's industry is slow.
Q3) The risk of material misstatement differs from detection risk in that it
A) Arises from the misapplication of auditing procedures.
B) May be assessed in either quantitative or qualitative terms.
C) Exists independently of the actions of the auditor.
D) Can be changed at the auditor's discretion.
Q4) What is the difference between audit risk and engagement risk?
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: Evidence and Documentation
Available Study Resources on Quizplus for this Chatper
95 Verified Questions
95 Flashcards
Source URL: https://quizplus.com/quiz/63435
Sample Questions
Q1) A company sells a particular product only in the last month of its fiscal year.The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made.The agents' sales were $10 million.Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year.The auditor would expect the year-end balance in the accrued commissions payable account to be
A) $528,000.
B) $540,000.
C) $588,000.
D) $600,000.
$10,000,000 × 98% = $9,800,000 Net Sales × 6% commission percentage = $588,000 estimated accrued commissions payable.
Q2) Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.
A)True
B)False
Q3) Discuss the reliability of the types of audit evidence and identify the level of reliability for each type of evidence.
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Internal Control in a Financial Statement Audit
Available Study Resources on Quizplus for this Chatper
103 Verified Questions
103 Flashcards
Source URL: https://quizplus.com/quiz/63434
Sample Questions
Q1) An auditor is least likely to test the internal controls that provide for
A) Approval of the purchase and sale of marketable securities.
B) Classification of revenue and expense transactions by product line.
C) Segregation of the functions of recording disbursements and reconciling the bank account.
D) Comparison of receiving reports and vendors' invoices with purchase orders.
Q2) Internal control has become a very important focus for publicly traded and privately-held companies alike.Internal control is intended to accomplish at least three objectives and consists of five components of internal control.List the three objectives and five components of internal control.
Objectives of internal control include:
1.reliability,timeliness,and transparency of internal and external,nonfinancial and financial reporting,
2.effectiveness and efficiency of operations,including safeguarding of assets,and 3.compliance with applicable laws and regulations.
Q3) The concept of internal control includes IT systems and manual systems.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Auditing Internal Control Over Financial Reporting
Available Study Resources on Quizplus for this Chatper
63 Verified Questions
63 Flashcards
Source URL: https://quizplus.com/quiz/63433
Sample Questions
Q1) ACL is an example of
A) An EDI software package.
B) An IT software package.
C) Software that allows auditors to retrieve and evaluate data from entity systems.
D) A type of networking.
Q2) Which of the following concerning the auditor's report on internal control over financial reporting is correct?
A) The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work.
B) In the report on internal control over financial reporting, the auditor can issue only a qualified or an unqualified opinion.
C) The auditor needs to state management's assessment of internal control over financial reporting, but does not necessarily need to comment on whether he or she agrees.
D) An unqualified opinion is required if a material weakness is identified.
Q3) Identify indicators of a material weakness in internal control over financial reporting.
To view all questions and flashcards with answers, click on the resource link above.
9
Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
Available Study Resources on Quizplus for this Chatper
67 Verified Questions
67 Flashcards
Source URL: https://quizplus.com/quiz/63432
Sample Questions
Q1) The tolerable deviation rate for a test of controls is generally A) lower than the expected rate of deviations in the related accounting records. B) higher than the expected rate of deviations in the related accounting records. C) identical to the expected rate of deviations in the related accounting records. D) unrelated to the expected rate of deviations in the related accounting records.
Q2) Based on a 5% risk of assessing control risk too low,how would an auditor interpret a computed upper deviation rate of 7%?
A) The auditor is willing to accept a deviation rate of 7% before deciding not to rely on the control.
B) There is a 5% chance that the deviation rate in the population is less than 7%.
C) There is a 5% chance that the deviation rate in the population exceeds 7%.
D) There is a 95% chance that the deviation rate in the population equals 7%.
Q3) When determining the sample size of accounts receivable to test,what are three factors that are important for you to consider?
Q4) Define sampling risk and nonsampling risk.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
Available Study Resources on Quizplus for this Chatper
53 Verified Questions
53 Flashcards
Source URL: https://quizplus.com/quiz/63431
Sample Questions
Q1) An accounts receivable account balance is $500,000 and the auditor determines a sample size of 30 would provide adequate assurance.The auditor plans to use a monetary-unit sampling plan with systematic sample selection.The auditor notices that there are six customer accounts of at least $15,000 and would like the systematic selection technique to select all items that are at least $15,000,even if that means the sample size is slightly larger than 30.To achieve the auditor's objectives,the sampling interval should be
A) 6.
B) 20.
C) 16,666.
D) 15,000.
Typically the threshold would be $16,666 ($500,000/30), but in order to guarantee the selection of all items greater than $15,000, the sampling interval needs to be no greater than $15,000. While a sampling interval of $6 or $20 would also guarantee that all items greater than $15,000 are selected, such small intervals would be inefficient and result in a sample size much greater than 30.
Q2) Describe two advantages and two disadvantages of monetary-unit sampling (MUS).
Q3) What is one advantage and one disadvantage of classical variables sampling?
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Auditing the Revenue Process
Available Study Resources on Quizplus for this Chatper
92 Verified Questions
92 Flashcards
Source URL: https://quizplus.com/quiz/63430
Sample Questions
Q1) To achieve good internal control,which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?
A) Billing.
B) Shipping.
C) Credit.
D) Sales Order.
Q2) Data Corporation has just computerized its billing and accounts receivable record keeping.You want to make maximum use of the new computer in your audit of Data Corporation.Which of the following audit techniques could not be performed through a computer program?
A) Tracing audited cash receipts to accounts receivable credits.
B) Selecting accounts to be confirmed on a random basis.
C) Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts.
D) Resolving differences reported by customers on confirmation requests.
Q3) Credit authorization is used to determine if a customer is able to pay for goods.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Chapter 11: Auditing the Purchasing Process
Available Study Resources on Quizplus for this Chatper
80 Verified Questions
80 Flashcards
Source URL: https://quizplus.com/quiz/63429
Sample Questions
Q1) Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?
A) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
B) Receiving the entity's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices.
C) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
D) Confirming accounts payable balances with known suppliers who have zero balances.
Q2) If payables turnover has increased significantly since the prior year,this is an indication that which of the following assertions for accounts payable might be violated?
A) Existence or occurrence.
B) Completeness.
C) Rights and obligations.
D) Valuation and allocation.
Q3) Describe three categories of expenses outlined in FASB Concept Statement No.5.
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Auditing the Human Resource Management Process
Available Study Resources on Quizplus for this Chatper
63 Verified Questions
63 Flashcards
Source URL: https://quizplus.com/quiz/63428
Sample Questions
Q1) In testing the payroll of a large company,the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review.What will be the best source to determine this?
A) Telephone contacts with the employees.
B) Tracing from the payroll register to the employee's earnings records.
C) Confirmation with the union or other independent organization.
D) Examination of Human Resource Department records.
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Q2) Explain how the human resource management process can affect the financial statements.
Q3) Proper segregation of duties is critical for the human resource management process.
A)True
B)False
Q4) Payroll-related expenses normally are not a material cost to the organization.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Auditing the Inventory Management Process
Available Study Resources on Quizplus for this Chatper
73 Verified Questions
73 Flashcards
Source URL: https://quizplus.com/quiz/63427
Sample Questions
Q1) Tracing costs used to price inventory to vendors' invoices test which of the following assertions?
A) Occurrence.
B) Cutoff.
C) Accuracy.
D) Classification.
Q2) Failure to record inventory in the proper period can affect all of the following accounts except:
A) sales.
B) receivables.
C) cost of Goods Sold.
D) prepaid Expenses.
Q3) An entity's physical count of inventories was lower than the inventory quantities shown in its perpetual records.This situation could be the result of the failure to record A) sales.
B) sales returns.
C) purchases.
D) purchase discounts.
Q4) Explain the importance of observing physical inventory during an audit.
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Auditing the Financinginvesting Process:
Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment
Available Study Resources on Quizplus for this Chatper
71 Verified Questions
71 Flashcards
Source URL: https://quizplus.com/quiz/63426
Sample Questions
Q1) Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?
A) Repairs and maintenance expense.
B) Depreciation expense.
C) Gain on disposal of equipment.
D) Accounts payable.
Q2) Which of the following policies constitutes a control weakness related to the acquisition of factory equipment?
A) Acquisitions are to be made through and approved by the department in need of the equipment.
B) Advance executive approvals are required for equipment acquisitions.
C) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
D) Depreciation policies are reviewed only once a year.
Q3) An example of a prepaid account is prepaid interest.
A)True
B)False
Page 16
To view all questions and flashcards with answers, click on the resource link above.
Chapter 15: Auditing the Financinginvesting Process:
Long-Term Liabilities, Stockholders Equity, and Income
Statement Accounts
Available Study Resources on Quizplus for this Chatper
63 Verified Questions
63 Flashcards
Source URL: https://quizplus.com/quiz/63425
Sample Questions
Q1) For most companies,stockholders' equity includes the following three accounts: preferred stock,paid-in capital,and retained earnings.
A)True
B)False
Q2) An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's
A) minutes of the board of directors' meetings.
B) transfer agent's records.
C) canceled stock certificates.
D) treasury stock certificate book.
Q3) The repurchase of stock includes the reacquisition of stock (treasury stock),but not the retirement of stock.
A)True
B)False
Q4) What kind of information would typically be found on an income statement account analysis working paper? What kind of tests can an auditor perform using this information? Why would an auditor conduct additional analysis on an income statement account?
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
Available Study Resources on Quizplus for this Chatper
68 Verified Questions
68 Flashcards
Source URL: https://quizplus.com/quiz/63424
Sample Questions
Q1) Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
A) There is no access to securities between the year-end and the date of the auditor's security count.
B) Proceeds from the sale of investments are received by an employee who does not have access to securities.
C) Investment acquisitions are authorized by a member of the Board of Directors before execution.
D) Access to securities requires the presence of two designated officials.
Q2) Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?
A) Reimbursement vouchers are not prenumbered.
B) Reimbursement of the fund from the general cash account occurs twice or more each week.
C) The custodian occasionally uses the cash fund to cash employee checks.
D) The custodian endorses reimbursement checks.
Q3) Identify 3 of the 6 tests an auditor uses on the bank reconciliation.
(Only 3 are required for the student's answer)
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: Completing the Audit Engagement
Available Study Resources on Quizplus for this Chatper
84 Verified Questions
84 Flashcards
Source URL: https://quizplus.com/quiz/63423
Sample Questions
Q1) Who generally signs the legal letter?
A) The board of directors.
B) The audit partner.
C) The CEO of the entity being audited.
D) The entity's attorneys.
Q2) An auditor is concerned with completing various phases of the examination after the balance sheet date.This "subsequent period" involving formal audit procedures extends to the date of the
A) auditor's report.
B) final review of the audit working papers.
C) public issuance of the financial statements.
D) delivery of the auditor's report to the entity.
Q3) What information is typically requested in a legal letter to an entity's attorney?
Q4) When auditing contingent liabilities,which of the following procedures would be least effective?
A) Reading the minutes of the board of directors.
B) Reviewing the bank confirmation letter.
C) Examining customer confirmation replies.
D) Examining invoices for legal services.
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Reports on Audited Financial Statements
Available Study Resources on Quizplus for this Chatper
76 Verified Questions
76 Flashcards
Source URL: https://quizplus.com/quiz/63422
Sample Questions
Q1) The predecessor auditor,after properly communicating with the successor auditor,has reissued a report because the entity desires comparative financial statements.The predecessor auditor's report should make
A) no reference to the report or the work of the successor auditor.
B) reference to the work of the successor auditor in the scope paragraph.
C) reference to both the work and the report of the successor auditor in the opinion paragraph.
D) reference to the report of the successor auditor in the scope paragraph.
Q2) When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes,it is the responsibility of the auditor to present the information,if practicable,in the auditor's report and express a(n)
A) qualified opinion or a disclaimer of opinion.
B) qualified opinion or an adverse opinion.
C) adverse opinion or a disclaimer of opinion.
D) qualified opinion or an unqualified opinion.
Q3) What are the four key audit report enhancements for all entities,which are effective for financial periods ending after December 15,2016?
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Professsional Conduct,Independence,and Quality Control
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/63421
Sample Questions
Q1) The AICPA Code of Professional Conduct deals mainly with behavior and actions of individual auditors.
A)True
B)False
Q2) According to the ethical standards of the profession,which of the following acts is generally prohibited?
A) Purchasing a product from a third party and reselling it to a client.
B) Writing a financial management newsletter promoted and sold by a publishing company.
C) Accepting a commission for recommending a product to an audit client.
D) Accepting engagements obtained through the efforts of third parties.
Q3) Professionalism refers to the conduct,aims,or qualities that characterize a given profession.
A)True B)False
Q4) Rules of Conduct are enforceable.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 21
Q5) When can a CPA disclose confidential information without the client's consent?
Chapter 20: Legal Liability
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/63420
Sample Questions
Q1) The Foreign Corrupt Practices Act requires that
A) auditors engaged to examine the financial statements of public companies report all illegal payments to the SEC.
B) public companies establish independent audit committees to monitor the effectiveness of their system of internal control.
C) U.S. firms doing business abroad report sizable payments to non-U.S. citizens to the Justice Department.
D) public companies devise and maintain an adequate system of internal control.
Q2) An auditor can be held criminally liable for
A) illegal acts under common law.
B) illegal acts under statutory law.
C) negligent acts when the third party has privity status.
D) tort of contract for failing to follow due professional care.
Q3) Common law
A) requires that the CPA guarantee their work.
B) requires that the auditor performs work with due care.
C) requires that the auditor performs work with due diligence.
D) does not recognize the concept of constructive fraud.
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Assurance,Attestation,amd Internal Auditing
Services-professional Judgement Module
Available Study Resources on Quizplus for this Chatper
98 Verified Questions
98 Flashcards
Source URL: https://quizplus.com/quiz/63419
Sample Questions
Q1) Internal auditors fall into two primary categories-assurance services and consulting services.Briefly explain these two categories in relation to internal auditors.
Q2) For an auditor to examine management's assertions about the effectiveness of internal control in an attestation engagement,three conditions are necessary.Briefly explain them.
Q3) For a practitioner to examine management's assertions about the effectiveness of internal controls,all of the following conditions are necessary except:
A) Sufficient competent evidence can be developed to support the evaluation.
B) The practitioner must have already concluded that the financial statements are fairly presented in accordance with the applicable accounting framework.
C) The entity's management accepts responsibility for the effectiveness of its internal control.
D) All of the conditions listed are necessary.
Q4) Limited assurance is provided in a review engagement.
A)True
B)False
Q5) Explain each of the three PrimePlus Services typically offered by practitioners.
To view all questions and flashcards with answers, click on the resource link above. Page 23